‘Green taxes’ for cleaner India?

Is green tax an answer for a cleaner India? The author contemplates if taxation is an answer

 Green, Tax

India formally ratified the Paris climate agreement on Sunday, notwithstanding that last week Donald Trump was trashing global warming as a hoax and efforts to control it as expensive and ineffective.

The United States contributes around 16 per cent of world carbon emissions. Truculence in its approach to manage global warming can scuttle the efforts of the rest of the world.

Mr Trump’s cavalier approach to climate change can only be explained by his belief that a slowing US economy should not be the one which pays to set the world’s climate right.

This abdication of international leadership appears to resonate with his not inconsiderable supporters.

Clearly, the expectation is that China, which contributes 28 per cent of global emissions, needs to step up to the plate of international burden-sharing. China is now the world’s second largest economy. Despite the slowdown it is growing at three times the rate of the American economy. That is reason enough for higher expectations from it to play the role of a global leader. India is also a fast-growing economy. In the long term we may be where China is today. But not for a while yet. We are just one-fifth of the Chinese economy. Our emissions are just six per cent of world emissions. Our global ambitions should be commensurate with our constraints. This is why, unlike China, we are not committed to cap our emissions at a predetermined level.

To be sure, domestic compulsions like smog do compel us to clean our energy profile. India already has economic incentives in place for this. High energy prices induce energy efficiency in industry. High taxes on petrol and diesel are expected to result in frugal consumption for personal transport. Scarce public funds are allocated to subsidise renewable electricity.

Investment in public transport is being stepped up to substitute high energy-intensity personal vehicles. Rail freight has been reduced to stem the shift to the more energy-intensive road transport.

Bulk public purchase and supply of low-energy intensive LED bulbs help manage domestic electricity peak load.

But the compulsions to consume more energy services are just as stark.

India’s per capita energy consumption is just 0.6 tons of oil equivalent (toe) versus global per capita consumption of 1.9 toe. Without a technological revolution in clean energy, India will consume more energy to grow and to provide welfare enhancing energy services to its citizens. Similar compulsions face most developing countries in South Asia and Africa.

The key reason the Paris climate agreement is being ratified is that countries have agreed to disagree. It is now left to individual nations to exercise “strategic direction” in developing their future energy profile and “tactical restraint” in energy consumption.

Altogether 37 per cent of India’s energy consumption is non-fossil fuel based. This is fairly similar to the world non-fossil fuel energy consumption of 33 per cent. But the big difference is that bio energy accounts for only two per cent of the world’s green energy consumption, unlike in India, where biomass accounts for 92 per cent of the renewable energy used.

Hydro power and new renewables — solar and wind- account for just six per cent and nuclear for two per cent of our green energy profile.

The challenge for India is to ensure that as incomes grow, poor consumers should graduate from using bio energy to new renewables like solar and wind, rather than go down the fossil fuel route, as the OECD countries have done. This challenge is principally for the government, not consumers.

Consumers typically want energy services — cooling, heating, cooking and transport. They don’t really care about the fuel that provides these services. It is for the government to put in place the incentives which drive energy suppliers to provide renewable energy services.

Setting up clunky publicly-owned entities to research and transfer renewable technology to industry is not the way to go. We don’t have the democratic space in India, unlike South Korea, to back industrial winners.

Transparent subsidies on the viability gap funding template will suit the private sector best to innovate, implement and increase the consumption of renewable energy.

India’s clean energy strategy is built around the principle of minimising environmental damage whilst maximising economic growth. But the implementation of good principles also need accurate and timely monitoring mechanisms to ensure that progress is along the desired trajectories.

One such mechanism is to monitor the social cost of our energy consumption and to use it for capital allocation. The Arvind Subramanian report on pulses has suggested the inclusion of social cost, with respect to water intensity, while determining the maximum support price of agricultural food products, to ensure that subsidies do not deplete our water reserves. This is a good way of allocating public resources.

If this mechanism was adopted for allocating finances, public investment in the railways and in coastal shipping would surely trump investment on road transport. This is also a good mechanism for making users pay differentially for the energy they use.

Charging more from those who use electricity at peak time is justifiable beyond the financial cost it imposes, to being an affirmation of commitment to going green. Habitats, offices and homes all impose social costs and must be taxed in proportion to the extent of their footprint. This “green tax” should be used to directly subsidise green energy and energy conservation.

The government should consider including a green capital allocation and tax collection balance sheet along with the annual financial budget. This would provide, at a glance, the revenues collected by taxing fossil fuel and the capital allocated for green energy initiatives. Similar green capital balance sheets at the state and municipality level could feed into a green national fiscal framework.

India has traditionally punched above its weight in international affairs. Preserving the global commons is a lofty goal, and an opportunity to upstage the international economic Goliaths and to improve well-being at home. We should not miss the bus this time.

This commentary originally appeared in Asian Age.

The views expressed above belong to the author(s).

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Sanjeev Ahluwalia

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